One of the top Canadian stocks I continue to focus on, for a number of reasons, is Toronto-Dominion Bank (TSX:TD).
Shares of the “Big 5” Canadian bank have been on a tear this year, surging from around $75 to start the year to nearly $120 at the time of writing. That move outpaces many of the top tech stocks in the country and suggests that investors may be looking for more defensive exposure to companies that are not only considered to have top growth prospects but also top dividend stocks right now.
I think there’s something to that thesis. Here’s what I think is behind TD’s recent rise, and where I see the top Canadian bank in five years’ time.
What’s driving TD’s impressive growth?
Overall, TD Bank has benefited disproportionately from a highly regulated lending environment in Canada, in combination with a unique model which makes this Canadian bank a truly international player.
At essentially the low point in valuations following the Great Financial Crisis, TD stepped into the U.S. market in a big way. The company snapped up a number of regional lenders in key U.S. markets close to the Canadian border in a number of multi-billion-dollar deals. This expanded the company’s retail presence in the U.S. and led TD to become a key North American lender that investors viewed as more than a Canadian stock.
That’s certainly been beneficial during the recent bull market rally in the U.S., which has allowed valuations south of the border to explode at a faster rate than at home. And while there may be some concerns under the surface within certain pockets of the investing landscape, TD has largely steered clear of the riskiest areas of the market, focusing on conventional loans to high-quality clients. I think this model should portend well for TD moving forward.
Where will TD stock go from here?
I have to say, TD’s incredible rise over the course of the past year is one that brings me some concern. On the one hand, this move is indicative of the market believing in the company’s underlying model. And notably, this move does provide credence to investors who (like myself) have been pounding the table on TD stock for a long time.
That said, at a valuation of around 10 times trailing earnings and with a dividend yield of 3.5%, it’s also true that it’s difficult to find a better option in the financial sector right now. In other words, I’d argue that TD’s recent move has almost entirely been fundamentals-driven, which is a welcome surprise given that most other stocks with similar moves have been sentiment or hype-driven in nature.
I’m of the view that TD stock will more likely than not trade closer to the $150–$200 per share range in five years’ time. That is, assuming we don’t have any major macro shock that takes the overall market lower over this timeframe.
